Developers rush in to meet pent-up demand for multifamily units

Apartments in Louisville’s urban core — like the ones proposed along South Fourth Street — are in high demand, industry experts say, but it’s unclear if the demand is great enough to generate the return on investment out-of-town developers are counting on. | Rendering by GBBN Architects

This article is the first of a two-part series that looks at the housing market in Louisville and what experts expect to see in the future. Part 1 examines multifamily housing, and Part 2 will address the rebirth of subdivision development.

For Louisville, the boom times are expected to continue into 2017 and beyond. Since 2014, more than $9 billion in capital has been injected into the local economy for new hotels, new office buildings, new distilleries and new housing, among other projects.

As the housing market continues to recover from the national foreclosure crisis and the demand for apartments remains strong, there has been a spike in development of subdivisions and multifamily complexes in Jefferson County.

To understand the scale and scope of housing developments and to see where companies are investing their time and money, Insider Louisville plotted apartment, condominium and subdivision projects that are under construction or in the development process on the map below. IL used city records to compile the data points for the map in an effort to make it as comprehensive as possible; however, there may be projects not reflected on the map.

The blue markers represent apartment developments; the red are condominiums; the green are subdivisions; and the purple are projects that feature multiple housing types. (To see the details of the projects, click on the markers for a description and location.)

‘Meeting the substantial demand’

Multiple industry experts have talked about the pent-up demand for apartments in Louisville.

Colin Underhill, a partner with Louisville-based development company Underhill Associates, attributed it to a long lull in multifamily development. The last multifamily housing spike here was in the 1970s, Underhill said.

Demand for apartments and the city’s population both have continued to grow. Still, the rapid expansion in apartment units during the latter half of this decade has some real estate experts questioning whether the market will become bloated.

There are at least 37 apartment projects under construction or going through the city approvals process in Jefferson County. They range from a four-plex project in Valley Station to a controversial development that calls for 700 to 740 apartments at Lexington Road and Grinstead Drive.

“The supply is still coming, but it is not yet meeting the substantial demand,” Craig Collins, executive vice president at Commercial Kentucky, told IL previously.

Apartments in Louisville with 50 units or more have an average occupancy rate of 95 percent, according to a recently released a report from Louisville real estate services firm Commercial Kentucky. The report looks at average monthly rental rates and occupancy rates for apartments as well as provides a brief outlook on the future of the apartment market.

“The next 12 to 18 months should prove to be very exciting for the Louisville apartment market as these new communities come online and attract residents to an active and growing urban environment,” the report states, noting that it expects a quick absorption rate, up to 30 units leased per month, as new units come online.

Most of the multifamily developments going on are apartment complexes, as some people don’t want to deal with the mortgage payments that come along with a condominium or single-family home.

People are looking for livability, something close to work and entertainment, and amenities such as valet trash pick-up, tennis courts and car wash stations, Underhill said. “People are willing to pay more for rent, to not be tied down to a mortgage, to be more maneuverable,” he added.

According to city records, there are only seven condominium projects under construction or in development; most have less than 25 units, with the remainder of the projects ranging from 47 to 63 condominiums.

“The condo market is a whole different bear right now,” said Allison Bartholomew, president of the Greater Louisville Association of Realtors.

A big hit to the condominium market was the Federal Housing Administration’s loan guideline changes in 2012, she said. The administration adopted stricter guidelines as a result of the foreclosure crisis, making it harder for condominium owners to find qualified buyers. Condominiums also come with homeowner’s association fees; that is an additional expense that doesn’t come with renting or with the purchase of some single-family homes.

A renter doesn’t get the equity involved in owning a condominium or house, to be sure, but some are finding that renting allows them to live in neighborhoods that they might not be able to otherwise, as well as enjoy amenities like pools, gyms and walkable neighborhoods.

“Everybody likes to walk somewhere,” Bartholomew said. “Walkability is that buzz word now.”

Out-of-town money fueling development

Colin Underhill | File Photo

Many of the apartment projects underway are a result of out-of-town developers jumping into the Louisville market.

Indianapolis-based apartment developer Cityscape Residential, for example, is building a 300-unit apartment complex called Axis on Lexington in the Irish Hill neighborhood, as well as a 251-unit apartment building near The Paddock Shops. In 2015, the company opened its first Louisville apartment development, Apex on Preston.

Kelli Lawrence, principal partner at Cityscape Residential, previously said that Louisville had great momentum and still was “in catch-up mode after years of undersupply.” The company was attracted to Louisville because of its potential and because, unlike Indianapolis, the multifamily housing market was less developed, she said.

As other cities become more saturated with multifamily housing, out-of-town developers are entering the underdeveloped Louisville market. While they may be less familiar with the city, to generate the best return on investment, developers need to be one of the first in the door rather than the 20th project.

Underhill said the influx of out-of-town developers is a positive for Louisville because it introduces new investors to the market who may go on to put money into other local projects.

“It creates more opportunities for us,” he said. “You learn what other people are doing, you grow relationships, and your market gets better.”

Out-of-town developers also are more willing to take risks and tackle projects that local companies may pass on.

Underhill Associates looks for a 10 percent to 12 percent return on its investments, Underhill said, but out-of-town developers are used to smaller yields in other cities, and therefore, are willing to invest in projects with lower returns, such as those in the urban core where business costs are high.

How many is too many?

Although there is still demand, the rapid development of new apartment complexes begs the question, how many units Louisville can sustain, particularly in and near downtown? Several upscale apartment projects are under development or under construction in the downtown area, including the 260-unit Main & Clay apartments, a proposed 232-unit Fourth Street development, and a proposed 276-unit apartment building on the Service Welding & Machine property.

“The big question for developers and projects in the urban core would be, ‘How deep is the market for the high-amenity urban developments?’ ” the Commercial Kentucky report asks.

The Service Welding & Machine development will include some 270 apartments and 5,000 square feet of retail. | Courtesy of Flournoy Cos.

The average monthly rental rate in Louisville decreased 4 percent during the third quarter 2016, according to the report, which looked strictly at complexes with a minimum of 50 units. However, the report argued that the decline was an anomaly and that rents would once again start to climb as new units become available.

“The new developments being delivered in Louisville have superior interior packages and, in the larger developments, an extensive amenity package which should increase average rents across the board,” the report concluded.

As of October 2016, the average monthly rental rate for a one-bedroom apartment was $740. The monthly rate was $1,170 for a three-bedroom apartment.

A few of the downtown apartment projects plan to charge more than $1,000 a month for their smallest units, which the Commercial Kentucky report said would bolster the average rental rate. But it remains to be seen if the demand for housing in the urban core will justify the higher rents.

Given the number of apartments that will come online in the next 12 to 18 months — nearly 700 new units downtown alone — Underhill said he is “a little bit skittish” when it comes to multifamily development.

Underhill Associates has stayed out of the downtown market, instead opting to focus on popular neighborhoods outside of the Central Business District. In 2016, the company opened the upscale 185-unit Germantown Mill Lofts, which is 91 percent leased.

“I have slight concern about the amount of multifamily being developed and constructed currently just because our population is not growing at a tick that I think can keep up with the same type of development that is going on in a city like Nashville,” Underhill said. “In a perfect world, from my standpoint, we would be in an environment where we had more job growth and more job creation.”

As more apartments come online, competition could force the apartment owners to drop their prices.

“You have got to have job growth to have more opportunities to lease,” Underhill said. Otherwise, “it doesn’t matter how nice your project is.”

Louisville developer Steve Poe expressed a similar sentiment at a Real Estate Venture Exchange luncheon in September. Poe stated that select “choice neighborhoods” were in high demand, but that Louisville might quickly hit a tipping point, if the city could not attract enough high-paying jobs.

“It all comes back to quality job growth,” Poe said during the luncheon.

Poe is looking to expand his RiverPark Place development along River Road by constructing a 110-unit apartment building. With the exception of RiverPark Place, Poe is ridding his portfolio of Louisville apartment complexes. He sold three of his Louisville apartment complexes this year, and the fourth, Dundee Place, remains on the market.

“Everything in real estate has cycles, and I am sort of the belief that maybe the apartments have run their cycle. There are a lot of apartments being built in the city right now,” Poe told Insider Louisville last year when he put the four apartment buildings on the market.

Mayor Fischer and economic development officials say the increase in housing options downtown and near the city’s business parks will help the city attract more residents and jobs.

In 2016, Louisville added at least 7,055 new jobs, according to Louisville Forward, the city’s economic development arm. That number only includes jobs created as a result of projects that Louisville Forward has worked on; job totals won’t be available until early next year.

Louisville has not experienced huge upswings or downturns in development compared with other cities, Underhill said, but it has the potential for rapid growth as long as the city is able to attract new residents and jobs.

“Louisville has every opportunity to do anything that a Nashville or Austin or Denver is doing,” he said. “I think we need to get away from the mentality that we will never be like that.”